National Systems of Innovation

Two features of the firm’s environment have a major influence on its innovation strategy; first the national system of innovation in which the firm is embedded and which in part defines its range of choices in dealing with opportunities and threats and second, its market position compared to competing firms, which in part defines the innovation based opportunities and threats that it faces.

The main thrust of the analysis was that global firms now hardly rely on their home — or any other one — country for their operations since they compete and increasingly produce in global markets. On the other hand, analysts like Porter and his colleagues have shown that business firms –and even the largest ones competing in global markets – are strongly influenced in their choice of technological strategies by the conditions existing in their home countries. This is because even global firms draw on mainly one or perhaps two countries for their strategic skills and expertise in formulating and executing their innovation strategies. As we shall see about 12% of the innovative activities of the world’s largest 500, technologically active firms were located outside their home countries in the 1990s compared to about 25% of their production and much larger shares of sales. As a consequence we find that the technological strengths and weaknesses of countries are reflected in their major firms.

In the 1990s the largest number of European firms amongst the technical leaders were to be found in the technological fields of industrial and fine chemicals and defense related technologies (i.e. Aerospace) which are fields of national technological strength whilst the reverse is the case in electronic capital and consumer goods. Japanese firms predominate in consumer electronics and motor vehicle technologies and US firms in fine chemicals and in raw materials based (i.e. oil, gas and food) and defense related technologies again reflecting the technological strengths of their home countries .

The strategic importance of the corporations of home countries’ technological competencies would matter little if they were all more or less the same. But the table had other data showing that they are not. Patterns of sectoral specialization differ greatly for example, the Japanese pattern of strengths and weaknesses almost the opposite of that in the USA. In addition, those countries differ in both the levels and rate of increase in the resources devoted by business firms to innovative activities. It shows, for selected OECD countries trends over 31 years in business funded R&D as a share of GDP (gross domestic product). As we have already seen, R&D captures corporate innovative activities only imperfectly. But it is one of the best available indicators of aggregate innovative investments, and international differences significantly influence national economic growth and trade performance.

Three major conclusions emerge from Table: First, and contrary to what many observers continue to assume, Europe and Japan did not progressively and smoothly catch up with the USA which was the technological leader in the period after the Second World War. Switzerland has always been amongst the leaders and remains so. As early as 1971, Germany and Japan overtook the USA and progressively increased their lead until the late 1980s. This was reflected in the relative performance in R&D and sales growth of the large firms based in these countries. Since then the trend has changed, with the shares of business funded R&D in GDP stabilizing in Japan, declining in Germany and increasing in the USA. At the same time the three Scandinavian countries have continued to increase their shares, with the growth of major firms in pharmaceuticals and telecommunications.